How HSBC allegedly became the ‘preferred’ bank for Mexican drug cartels

HSBC Holdings PLC reached a landmark $1.9 billion settlement with U.S. authorities over allegations that the U.K-based big bank intentionally permitted illegal transactions with a variety of countries including Iran, Libya, Sudan and Burma.

However, documents released Tuesday provide new details also about how HSBC allegedly became “the preferred bank” for narcotics drug cartels in Mexico and Colombia and left “dangerous gaps” that traffickers abused with major cash deposits– all while top executives froze staffing at the bank’s anti-money-laundering unit.

A Justice Department statement notes that banks are supposed to try to mitigate money-laundering risks by monitoring wire transfers. HSBC allegedly used an internal system that would trigger a review of wire transfers based on the amount of the transaction and the type and location of the customer.

However, between 2002 and 2009 HSBC ranked Mexico as having “standard” money laundering risks, the lowest of the bank’s four possible country risk ratings. As a result, the Justice Department contends that its transactions in Mexico weren’t subject to HSBC’s automated monitoring unless customers were classified as high risk. Read about how HSBC officials were quizzed about money-laundering in July

Basically, the low ranking allowed “hundreds of billions of dollars” in wire transfers from Mexico to be excluded from the bank’s internal reviews, as a result, the Justice Department alleges.

Specifically, the government says HSBC failed to monitor over $670 billion in wire transfers from HSBC’s Mexico division between 2006 and 2009 and failed to monitor over $9.4 billion in purchases of U.S. dollars from HSBC’s Mexico unit over the same period. (The Justice Department’s said HSBC’s Mexico division became the “preferred financial institution for drug cartels and money-launderers.”)

The Treasury Department notes that HSBC allowed “hundreds of millions of dollars” from Mexican drug trafficking organizations to flow though accounts in the U.S” even though the bank had “substantial resources” to limit money-laundering risks.

Specifically, $881 million in drug trafficking proceeds by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Columbia were laundered through HSBC’s U.S. unit without being detected by the bank, the Justice Department alleges.

The agency also adds that HSBC failed to monitor over $200 trillion in wire transfers between 2006 and 2009 from countries that HSBC’s U.S. unit deemed to be “standard” or “medium” risk.

Separately, the Justice Department also focused some of its investigation on HSBC’s U.S. Banknotes division, which it said was a natural high-risk for money laundering because it involved currency transactions.

The government review said that between 2006 and 2009, the unit had only one or, at times two, compliance officers responsible for reviewing transactions of between 500 and 600 customers.

At one point in 2007, HSBC senior executives allegedly instructed its anti-money laundering departments to “freeze” staffing levels as part of a bank-wide effort to “cut costs and increase the bank’s return on equity.” The Justice Department said the goal was accomplished by not replacing departing employees, combining the functions of multiple positions into one, and not creating new positions.”

By October, 2009, a senior executive in HSBC’s U.S. compliance unit allegedly said its anti-money-laundering efforts have “gone down the hole in the past 18 months,” the Justice Department said.

Over the years it became easy for narcotic drug traffickers, says assistant attorney general Lanny Breuer:

“These traffickers didn’t have to try very hard. They would sometimes deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows in HSBC Mexico’s branches,” he said.

– Ronald D. Orol

Follow Ron Orol @rorol

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